By Mirella Pisciuneri, CPA, CA and Katherine Forbes, CPA, CA, CPA (Illinois)
*Mirella and Katherine were guest contributors to McCarthy Tétrault’s Consumer & Retail Advisor blog. The original of this article appeared on the Consumer & Retail Advisor blog in July, 2016.
Roughly one decade ago, there was much speculation as to how Canadian retail brands would fare when international fast-fashion chains began opening stores in Canada. In addition, while new chains have made their presence known across the country and with increasing consolidation and emphasis on e-commerce, the retail market has become increasingly interesting to watch.
Large and established fast fashion brands of significant scale are often vertically integrated, with a sophisticated product development system able to supply fresh and interesting products to consumers at exceptional speed as fast as a weekly change in products (i.e. 52 times per year), as opposed to a seasonal revamp (three times per year).
While some brands such as Jacob and Smart Set have been pushed out of the market in recent years, others have been able to stay the course.
In addition to these pressures, financial realities are adding pressure to Canadian retailers. The foreign exchange rate of the USD experienced a greater than 10% swing in the year, reaching a monthly average high of $1.37 in December, 2015. Canadian companies that were not positioned well to hedge against these fluctuations have had limited ability to pass the cost saving along to their customers. Additionally, there have been heightened discussions to raise the minimum wage in some provinces across the country. Store payroll accounts for a significant portion of the cost on traditional retailers. Substantial increases to the minimum wage may impact profitability – although whether this will be the case for sure, is still to be seen.
The following are some steps that Canadian retailers can take to address these pressures in a changing landscape shaped by increased variety and susceptibility to foreign exchange rate fluctuations.
Merchandise planning and inventory control (“OTB”)
These processes are one of the biggest contributors to cash control in tough times. Tighter controls and comprehensive planning help ensure you are getting the best ‘bang for your buck’. Richter has observed that, unfortunately in many of the cases of underperforming companies, they are either not at the right place, or these processes have been implemented too late to be effective or make up for lost ground.
Product development & vertical integration
The need to keep up with the increased cadence of new products coming from fast-fashion retailers creates a challenge for inventory controls, and places pressure on production and design teams (particularly those of smaller brands). However, this also creates an opportunity for such retailers to market their products as being more exclusive in nature. Highlighting this angle as part of your retail strategy could be beneficial.
Rent or leasing costs are one of the most significant expenses for retailers with physical store spaces. Retailers should consider their physical store footprint and how it is being used. A strategic retailer should look at all cost areas and make decisions based on the current situation, but also projections long term.
Outsourcing non-core competencies
Outsourcing non-core competencies or even distribution functions, and evaluating cost centre process improvements often allows for an increased or renewed focus on the core business and can also convert fixed costs into variable costs, which make it easier to scale costs to fluctuations in sales volume. A diagnostic into various cost centres can result in previously unseen areas for cost savings, especially for consumer-facing businesses.
It’s important to monitor sales, profitability and costs, proactively. Consider vertical integration as an important element in achieving acceptable profit levels, and think lean. These suggestions for process improvement can help Canadian retailers stay successful in the current landscape and beyond.
Richter compiles a Weekly Retail Sales Summary which provides further insights into the sales and comparative rates of leading retailers.
About Richter: Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.
 “Canada’s Retail Exodus.” Financial Post. 15 January 2015. http://business.financialpost.com/news/retail-marketing/canadas-retail-exodus-heres-whos-closed-up-shop-in-canada
 “Minimum wage increases reignite livable income debate.” The Globe & Mail. 1 October 2015. http://www.theglobeandmail.com/report-on-business/economy/five-provinces-hike-minimum-wage/article26618941/